Loss of funding source has officials grappling with how to pay for statewide broadband project

A problem in the solicitation to build a high-speed broadband network across Kentucky has jeopardized funding for the project, a top administration official said Thursday.

Work continues on putting the new system in place, but state officials say concerns raised by how the deal was initially structured under former Gov. Steve Beshear have raised questions on how to pay for it.

A flaw in the project solicitation put the state at risk of losing a federal subsidy for Internet service to Kentucky’s 173 public school districts, William Landrum III, secretary of the Kentucky Finance and Administration Cabinet, said at a meeting Thursday.

The state spends $12.5 million a year for that service, but gets back $11 million from the subsidy. The state later canceled the solicitation, so the subsidy continues.

However, that erased nearly 40 percent of the annual funding that was supposed to go to a private company to build and operate the new broadband network.

With that off the table, taxpayers could be liable for the payments, according to officials in Gov. Matt Bevin’s administration.

The project at issue is called KentuckyWired. The plan is to install 3,400 miles of high-capacity fiber-optic line around the state in order to boost broadband Internet speeds.

Supporters say the project will make Kentucky more competitive for jobs and improve health care and education.

Some places in Kentucky have good Internet speeds, but the state as a whole has ranked near the bottom of the nation in average Internet service speed.

The state set up KentuckyWired as a partnership, with taxpayers owning the system but private companies building and operating it.

An Australian company called Macquarie won the solicitation last year to build the system.

The legislature authorized $30 million for the project, and U.S. Rep. Hal Rogers, a Republican who represents Southern and Eastern Kentucky, helped arrange for $23.5 million in federal funding. Rogers has pushed for the project because of the potential to help the economy of Eastern Kentucky, which is struggling with a sharp decline in coal jobs.

The deal called for Macquarie to pay most of the cost of the $324 million project. The company is to get its return over the 30-year contact by selling service, including to 1,100 state government offices.

However, Landrum said the complex solicitation for private partners did not pass muster to preserve the federal subsidy for Internet service to public schools because it was not a truly competitive process.

The solicitation was set up as a “must-win” for the Kentucky Communications Network Authority (KCNA) in order to keep the money from public schools in the mix, Landrum said.

There also was an issue because officials who helped draft the proposal at one state agency later moved to KCNA, Landrum said.

“There needed to be a separation between the bidder and the provider,” Landrum said.

Communications giant AT&T now has the contract to provide Internet service to the state’s public schools. After the company protested, the state withdrew the proposal to move the business to another provider.

Landrum has not re-issued the proposal, and said Thursday he did not know when he would.

However, he said whatever the administration does must satisfy requirements to keep the federal aid for public school Internet service.

“I will not take that risk with our education,” Landrum said of losing that money.

David Couch, a state Education Department official, said Kentucky’s public school system is a national leader in technology and is reluctant to move to the new KentuckyWired system until it has been proven reliable, he said.

Couch said he thinks it will take longer to establish the complex new system than officials have projected.

However, Doyle Friskney, with the Kentucky Council on Postsecondary Education, said he does not expect problems because the private company set to run KentuckyWired is a proven leader.

Without KentuckyWired, the state will pay the same amount of money for slower service and face the potential for big price increases, Friskney said.